Stocks to buy

Best Stocks 2022: How Roku Stock Warned Us of the Current Bear Market

In December 2021, I chose Roku (NASDAQ:ROKU) for InvestorPlace’s Best Stocks for 2022 contest. Since then, it’s been an unmitigated disaster. Shares are now 88% off the all-time high and Roku stock is down 75% in 2022. This is the complete opposite of “stock of the year.”

I’ll be completely honest, I just didn’t see that type of decline happening.

By the time 2022 began, Roku stock was already in the midst of a painful bear market, down more than 50% from the all-time high it hit a few months earlier. Typically, quality growth stocks are a buy on the 50% to 60% declines. Really, anything over 40% tends to be a great long-term opportunity — again, assuming you buy quality companies.

As the S&P 500 and Dow Jones were hitting new all-time highs at the start of the year, it appeared that we were still in a bull market. In reality, we were in a shadow bear market, which crept just below the surface and had already swallowed up names like Roku.

Roku’s fall wasn’t an accident waiting to be bought in a bull market — it was a red flag for the coming bear market.

Best Stocks 2022: A Dive Into Roku

Roku stock is now back down to the Covid-19 lows around $58 at the time of writing. In fact, it recently breached that level on Sept. 27, bottoming at $57.75. I don’t know where or when this name will bottom. However, I do know it’s in a better place right now from a business perspective.

Analysts still expect about 13% revenue growth this year to more than $3.1 billion. That’s great, but it’s coming at a cost. Rising inflation and supply-chain issues are squeezing Roku, which has eaten a bulk of the rising costs.

Roku may be doing well from a market share perspective, but it shows the true cost of competing with conglomerates like Amazon (NASDAQ:AMZN) that truly do not need to raise their prices.

That shows up in the earnings estimates, too. Last year, Roku was generating solid gross profit and impressive free cash flow. After earning $1.71 a share last year, it’s forecast to lose $3.28 a share this year.

At the end of 2019 — less than two months before the Covid-19 selloff — Roku generated a gross profit of $495 million on revenue of $1.12 billion (44% gross margins). It traded down to a low of $58.33 in March 2022.

For the trailing 12 months, the company has generated $3.03 billion in sales and generated gross profit of $1.46 billion (48% gross margins). It’s now just under the 2020 low this week.

That’s just some perspective on reality.

What to Do With Roku Stock Now

So we know that even in the battered year of 2022 (granted, we have Q3 and Q4 of 2021 in the trailing numbers above), the company is more successful than it was three years ago. That’s even as the share price is back to multi-year lows. But as we’re seeing with Twilio (NYSE:TWLO) and others in the same boat, investors just don’t care right now.

At the Covid low, we were seeing pure panic and liquidation. Hence, Roku stock falling 61.5% from its 2020 high. However, there was also reason to be optimistic back then.

While the economic outlook was as cloudy as ever, people were still streaming video and, for the most part, paychecks were coming in. Further, the Fed and other central banks were accommodative rather than tightening. In other words, the moment was bad, but the outlook was good.

We have a horribly different situation now, as inflation runs wild and global central banks seem willing to risk a recession to bring it back under control.

How that impacts Roku is clear. A recession equals less consumer spending, but, more importantly, it also means less advertising dollars to go around. Ad revenue is a big part of the company’s platform revenue. With that on shaky ground, the outlook is not promising and, thus, ROKU stock has been crushed.

Estimates for 2025 revenue have fallen from $9 billion in November 2021 down to $5.5 billion currently. Estimates for FY 2023 (next year) have fallen from $5 billion down to $3.6 billion.

So while there are still growth expectations, one can see why the stock has fallen so abruptly.

The Bottom Line on ROKU Stock

All of this boils down to one simple question: What now?

Stocks only go down for so long — even the hated ones like Roku. However, with dimming prospects on the future — guidance was a disaster last quarter — and a bear market rolling through equities, who wants to own Roku stock?

Eventually, the storm will clear, ad dollars will come back, and Roku will benefit from the secular trend of streaming video. Despite all the trauma to the stock, it’s easy to forget that streaming video continues to gain momentum.

While the doom and gloom is at an all-time high and sentiment is near an all-time low, Roku stock is already down 88%. At some point, enough will be enough and shares will (hopefully) enter a new bull market. However, when that time comes and where the low is, remains to be seen.

Let Roku stock be a lesson for blind buy-and-hold growth investors.

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.